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Friday, February 13, 2009

Liberal Lies, Fallacies and Misconceptions About Tax Cuts, Government Spending and Stimulating the Economy

The American people and its economy is about to act much like a guinea pig for a multi trillion Dollar liberal experiment in economic management. We will one way or the other be able to answer whether or not massive spending and Keynesian principles can manage and stimulate the economy. While that happens, it is also important that will confront several liberal misconceptions about current and past policy.

1) The last eight years was a referendum on supply side economics, and the referendum was failure.

The last eight years may have been a referendum on Bush economic policies, but it was NOT a referendum on supply side economics. If anything, the last eight years re affirmed that supply side economics works. Bush's tax cuts were enacted in 2001-2003 and they were meant to counter the recession at the beginning of the decade. In fact, about a year and a half after their initial enactment, our economy began growing jobs again and it continued growing jobs until the beginning of 2008. Nothing in the last eight years speaks ill of supply side economics. Nothing within supply side economics says that tax cuts should be combined with runaway government spending. It doesn't say that government should look the other way on mass fraud. Blame Bush for the crisis, but blaming supply side economics is just plain wrong.

2) In Japan, the government didn't spend enough.

In fact, if ever there was a blue print for our own crisis, and what will happen, it is Japan. In Japan, a decade long recession was also similarly started by a real estate bubble that burst. In Japan, the banks also similarly became insolvent. In Japan, the banks were also bailed out and encouraged to lend. In Japan, the government also began a campaign of massive government spending. In fact, the government gave several bailouts and several stimuli. None of it worked. Eventually, the deficit reached about 15% of Japan's GDP. Still, the 1990's are referred as the lost decade. In Japan, it wasn't that government didn't spend enough. In fact, government spending and neverending bailouts were the problem itself.

3) Tax cuts won't work because people are too scared to spend.

Daniel Gross is the latest to make this argument.

Psychology plays a big role in all sorts of economic decisions. And at times like these, when people are gripped with fear, it plays an even larger role. In such a climate, cutting taxes can't hurt. But should we expect it to have the same effect it would have in a period when people are generally confident and secure? If you believe the typical American worker would respond to tax cuts the way a typical tenured Harvard economist would, then it makes all the sense in the world to focus on tax cuts to the exclusion of other types of stimulus. But if you believe the typical American worker might respond to tax cuts the way, say, a typical Cambridge-area worker would, you might be less sure.

When has there ever been an economic downturn when people weren't scared? Do the folks that make this argument think there was no fear in 1981? How about in 2001? Do you think that people weren't scared of what would happen following 9/11? Yet, tax cuts were the only stimulus necessary to pull the economy out of those two economic downturn. The idea that this one is so different that tax cuts won't do the same is ridiculous. During any economic downturn, people are scared. Do you know what makes them feel better? Having more money makes them feel better and that's what tax cuts provide.

4) FDR's handling of the economy in the 1930's proves that Keynesian economic policy works.

I don't want to get into a long debate about FDR's economic record, however, it is safe to say that his record continues to be up for debate. For me, what's most important was that unemployment continued to be in the double digits in 1940, eight years after taking office. If his policies were so successful, why was there still a recession eight years later? The bottom line is that FDR's policies settle nothing one way or the other.

5) This crisis is like no other and so it needs action like no other.

This is yet another statement often made during every economic downturn. In 2001, we heard much of the same. Our economy had just been hit with the popping of the internet bubble. That cost three trillion Dollars in paper profit. Not nine months after this, 9/11 hit our economy. One million jobs were lost in the immediate after math. Then, we were hit with the revelations about Enron et al. I would say that things looked rather dire and that wasn't even eight years ago. Whenever you go through economic difficulties, things look so bleak that you think that this is the worst.

Our economy has faced such dire states before, and it will likely face them many times in the future. As such, the argument is nothing more than a trojan horse.

6) Deficits are a natural part of any recession and so President Obama's stimulus is not unreasonable.

That maybe true, however the sort of deficit we are talking about is not natural. It's one thing to see your deficit balloon 50%. It's quite another to see it balloon exponentially. That's what is happening now. This is not natural, and it has consequences. If we are ever to revive the economy, then we have to pay for all of this deficit spending. We will pay for it by equally scary inflation.

7) We have no other options and we have no time to waste.

In fact, we have plenty of options. The reality is that we have moved immediately to the most dramatic option. There are plenty of taxes that could be cut, but the government has chosen not to cut any of them. This economy could easily be jolted by a significant cut in the corporate tax, the capital gains tax, or across the board income tax cuts. We could see if all of this aggressive monetary policy will have an effect. Frankly, we could merely reverse marked to market and see if reversing that obscure rule won't help.

All that this dire talk does is scare people. When people are scared, they don't act rationally. No one in their rational mind would want to borrow and spend nearly a trillion Dollars. They are all doing it at the barrel of the financial gun. Those that support this plan are supplying that gun by making it seem this dire.


Jason Gillman Jr. said...

Actually, the two economists from UCLA who penned a paper back in 2004 showing that FDR's New Deal being the reason for a 7 year extension of the great depression had a piece in the WSJ. Here is the link, and it's recent (2 Feb 2009).

I think this paragraph is the key point that EVERYONE should recognize:

The main lesson we have learned from the New Deal is that wholesale government intervention can -- and does -- deliver the most unintended of consequences. This was true in the 1930s, when artificially high wages and prices kept us depressed for more than a decade, it was true in the 1970s when price controls were used to combat inflation but just produced shortages. It is true today, when poorly designed regulation produced a banking system that took on too much risk.

Apparently history be damned.

Harold said...

Just to balance things for your readers Mike [so we all can be more informed of course]

Everything would be different if we had spent the last 8 years preserving the budget surpluses that Bill Clinton bequeathed to George Bush. Then we would have paid down a lot of the national debt by now, instead of doubling it. We would be in a strong enough fiscal position to undertake the expansion that we really need.

In that light it is ironic, to say the least, that the politicians who are warning against the size of the stimulus bill, particularly the Congressmen who are voting against it, are mostly the same Republicans who supported the original fiscal policies that gave us the doubling of the national debt: the huge long-term tax cuts of 2001 and 2003 and the greatly accelerated rate of government spending. What we need now is a fiscal policy that maximizes short-run demand stimulus relative to long-run damage to the national debt. Lots of bang for the buck. The Republicans supported fiscal policies that did the opposite. Lots of buck for the bang. They are still doing it today when they argue that tax cuts give stimulus and spending does not. One doesn’t even hear them give an economic argument in support of this position (such as the, admittedly discredited, theories of the supply siders). They just close their eyes and endlessly repeat their “tax cut” mantra, like a religious cult that can’t even remember why.

Here is a link discrediting your tax cut assertions.

mike volpe said...

I believe that I pointed out that Bush spent too much, though saying that everything would have been different is a bit much.

Furthermore, Clinton was dealing with peace time whereas Bush was dealing with multiple fronts and an overall war.

I am sure that you can find someone that disagrees with me. That isn't hard to find however it's much better if you think for yourself. Simply putting a link is nonsense.

Harold said...

The link is helpful to people with open minds who are interested in learning. But its not helpful to close-minded people. It threatens them

This man understands economics more deeply than I do. [and I suspect you do].

Of course academics disagree, its a questions of sifting through the information and deciding for oneself.

Rather than, as most people do, blindly taking a position according to inbuilt prejudice and bias and then arguing anyone who dares question them.

The Left and Right are guilty of it and it doesn't help anyone.